Autonomy boss Lynch ramped sales ahead of HP deal, court told

LONDON (Reuters) – British entrepreneur Mike Lynch artificially inflated revenue at his Autonomy software company before selling it to Hewlett Packard for $11 billion, the U.S. firm’s lawyer told a London court on Monday.

HP is suing Autonomy founder Lynch, once hailed as Britain’s answer to Bill Gates, along with his former finance chief Sushovan Hussain for $5 billion after the 2011 deal went disastrously wrong for the Silicon Valley group.

Lynch denies any wrongdoing and says HP’s mismanagement was responsible for the failure of the acquisition.

HP had bought big data firm Autonomy with the aim of making it the centerpiece of a plan to transform HP from a computer and printer maker into a software-focused enterprise services firm, a shift that rival IBM had already pulled off.

But a year later HP wrote down the value of Autonomy by $8.8 billion, saying it had uncovered serious accounting improprieties. These have led it to pursue Britain’s biggest-ever fraud trial against Lynch and Hussain.

Lawyer Laurence Rabinowicz QC, representing HP, told London’s High Court that Lynch and Hussain had knowingly been involved in “widespread and systematic false accounting” to create a materially false picture of Autonomy’s finances.

Autonomy had engaged in “revenue-pumping” by encouraging customers to buy its products in exchange for buying goods from them that it did not need, restructuring deals to produce upfront license fees, and covertly selling pure hardware not even programmed with its software at a loss, he said.

In 2009, when Autonomy’s profitability was clearly seen to be damaged, the company blamed launch costs for a new database search product called SPE, rather than these activities, in a call with financial analysts, Rabinowicz said.

A spokeswoman for Lynch said in an emailed statement: “Mike Lynch is pleased to finally have the opportunity to respond in court to HP’s accusations. There was no fraud at Autonomy.”

“The real story is that HP, after a history of failed acquisitions, botched the purchase of Autonomy and destroyed the company, seeking to blame others. Mike will not be a scapegoat for their failures.”

Lynch’s spokeswoman said the case “distilled down to a dispute over differences between UK and US accounting systems”.

Rabinowicz, however, said in court the issues were not a matter of complex financial niceties but rather of clear intention. “This is not a business dispute about how to apply accounting procedures,” he said. “This is a fraud case.”

Lynch observed proceedings from a back corner of the courtroom, occasionally scribbling notes or sending messages on his phone.

The 53-year-old, who also faces criminal wire- and securities-fraud charges in the United States, which carry a maximum 25-year prison term, is likely to appear before the London court around July.

Lynch received about $800 million for his stake in Autonomy, which started to turn sour before it was completed.

FILE PHOTO: Mike Lynch, founder of Autonomy, poses for photographers at an awards ceremony in central London March 13, 2008. REUTERS/Toby Melville

Many shareholders baulked at the 79 percent premium, and the architect of the strategy, then-chief executive Leo Apotheker was sacked.

Lynch was subsequently fired by Meg Whitman, who took over as HP CEO in 2012.

Both former CEOs are likely to appear as witnesses in the trial, which is expected to continue until the end of the year.

Additional reporting by Paul Sandle; Editing by Alexander Smith

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